On Feb. 12, the Ministry of Finance announced a draft proposal for a combined housing and real-estate tax, including provisions for tax incentives for long-term ownership. The proposal says that the income made from sales of any property — exempting the sale of property for one’s personal use — should be taxed at a flat rate of 17 percent, regardless of how much profit is made on the sale.
In addition, for every year a property is owned after an initial two-year period, this amount would be reduced by 4 percent, up to a maximum reduction of 80 percent. The tax rate is halved for people who own land that is built on. Let us explore the tax incentives for long-term ownership.
First, capital gains taxation often leads to the “lock-in effect” or the “bunching effect.” Supporters of tax incentives for long-term ownership maintain that the finance ministry’s draft would mitigate, to a certain degree, these effects, and could be used to reduce property and land speculation.
Second, looking back at the history of capital gains taxation in the US, the provision of tax incentives depending on length of ownership first occurred with the Revenue Act of 1921, in which two years was set as the threshold for ownership. Between 1934 and 1941, ownership lasting one year, two years, five years and 10 years were set as the markers at which reductions in the capital gains tax of 20 percent, 40 percent, 60 percent and 70 percent respectively were given.
After this, new rules were introduced, defining ownership of one year as short-term ownership, between one year and 18 months as medium-term, and over 18 months as long-term for capital gains tax purposes. At the moment there is only one delineation — one year — distinguishing short-term from long-term. These regulations have been in place for over 90 years, and serve as a good reference.
Third, earned income depends upon a person’s ability to work over the long term, and can decrease over time due to health and age. In comparison, income from assets has a higher tax burden. Also, Article 14 of the Income Tax Act (所得稅法) provides tax breaks to individuals earning from registered stocks or bonds if they have held those stocks or bonds for one to three years.
As a result, different kinds of assets — stocks or property — have different effects on taxation. If you think that long-term ownership can promote the development and use of real estate, and that it is beneficial to society overall, then these tax incentives can still be seen as allowing horizontal equity.
Fourth, in terms of vertical equity, holding costs — such as holding tax, loan interest, renovations, repairs and maintenance costs — should be deducted from capital gains. This works in actuarial theory, but is not easy in practice. For example, with small-scale refurbishment work, very few taxpayers obtain or hold on to every receipt.
At times like these, the rational basis for tax incentives for long-term ownership ought to be decided according to taxation principles and the responsibility of the taxpayer, to avoid difficulties with the provision and verification of proof.
Finally, legislation must concentrate on taxation, with tax exemptions being the exception. When legislators want to introduce tax incentives, they ought to first consider whether the desired policy objectives are strong enough to warrant violating the ability to pay principle. If they are not, they are likely to be found unconstitutional.
Yuan Yi-hsin is an associate professor at the Graduate School of Science and Technology Law at National Yunlin University of Science and Technology.
Translated by Paul Cooper
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